California Governor Jerry Brown signed a bill into law that will restore the ability to bifurcate state Low-Income Housing Tax Credits and will allow the certification of state LIHTCs.

The law bill restores the ability to bifurcate state low-income housing tax credits for all reservations made prior to January 1, 2020. California had allowed the bifurcation of state credits from 2009 to the end of 2016. The new law also applies retroactively to reservations made to date in 2016. Bifurcation means that the state credits may go to a different investor than the federal credits.

Second, the bill creates a new authority for projects receiving reservations before January 1, 2020 to “certificate” state credits. While the bill technically applies to reservations made in 2016, it also includes a provision requiring the applicant to make an irrevocable election in his or her initial application to TCAC. This new authority effectively will be available beginning with 2017 reservations. Certification means that the state credits may be sold outright to the state investor, as opposed to inviting the state investor into the partnership. Under this model, the state investor need not have an ownership interest in the project. Because federal tax law treats a bought credit differently from one received as a partner, this new law has the ability to eliminate the federal tax impact of state credits for the investor and significantly increase state credit pricing. Applicants seeking state credits will have the ability to use this new certification model or continue with the traditional investor as a partner model. If the applicant chooses the certification model, the law requires the following:

  1. The state credit pricing shall be at least 80 cents on the dollar (there are limited exceptions if pricing changes after reservation).
  2. The state credit buyer must be or have been a traditional federal tax credit investor in any other tax credit project in California.
  3. The applicant must report specified information to TCAC within 10 days of the sale. TCAC intends to create a form for this purpose.
  4. The initial state tax credit buyer may only resell the credit once. Thereafter, it may not be sold again.
  5. The applicant remains remain solely liable for all obligations and liabilities imposed by the state tax credit program.